Estimating South Africa’s output gap and potential growth rate

Policy Paper 21
Author(s): 
Johannes W. Fedderke and Daniel K. Mengisteab
Publication date: 
March, 2016
This paper estimates the potential output of the South African economy using several univariate filters as well as taking a production function approach. Our aim is to compare the sensitivity of the results to the different methodologies and different measures of output. We find that the potential output is sensitive to the different methodologies and different measurements of output. A Cobb-Douglas specification of the production function is employed, dividing the economy into eight sectors. We find that the production function produced results similar to the band-pass filters but with gaps of lower amplitudes. We then use the Hodrick-Prescott, Christiano-Fitzgerald, and a Kalman filter to observe the natural growth rate of the South African economy from 1960 to 2015. We find estimates of the natural growth rate in the 1.9% - 2.3% range. However, there is also evidence to suggest that the rate is under considerable downward pressure in the post-2010 period. The strongest decline is in the real sectors of the economy (Manufacturing, Mining), the greatest resilience in the service sectors (financial in particular).
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